In our first blog addressing financial pitfalls in leases, we focused on rent review. Here we will explore two more common areas within commercial leases that contain potential pitfalls: service charge and dilapidations liability.
When letting only part of a building on a large science park, you may think that you have no control over your service charge liability. While landlords do strongly prefer service charge provisions across their leases to be on consistent terms, that doesn’t mean there is no room to negotiate, nor that you must accept the landlord’s service charge accounts as a fait accompli. You have three main, non-exclusive options here:
- Service charge cap: This cap would need to be built into your lease and generally needs to be agreed at heads of terms stage. If the landlord incurs costs exceeding the cap, it is responsible for that excess. This is superior to a fixed service charge, which entitles the landlord to profit in years where the cap exceeds the costs. Landlords commonly resist caps for obvious reasons, but if the service charge per square foot is high, especially when compared to competitor science parks, you might just be successful.
- Service charge exclusions: These should be incorporated into your lease such that any specified excluded items fall outside the costs that the landlord can include in the service charge – you will usually need to seek their inclusion, though. Common examples are costs relating to unlet units, to the initial development of the science park (or your particular building), and to another tenant’s breach of lease.
- Service charge accounts: Your lease ought to incorporate a right for you to inspect the service charge receipts and other data that form the basis of the service charge accounts, usually by appointment with the science park manager or managing agents. If your service charge is higher than expected, consider exercising this right to ensure that the landlord is not attempting to charge you for services not listed in the lease or any items that are excluded.
Repairing and yielding up
You will no doubt be responsible for some level of repair of your premises (which might include laboratory equipment provided by the landlord), though the standard of repair may be subject to negotiation. The repairing covenant is relevant at two distinct times:
- throughout the term; and
- at the end of the term, when you will be obliged to “yield up” the premises in the state of repair required by the lease.
Landlords usually appoint surveyors to prepare a schedule of dilapidations following the end of the lease term (at your cost), outlining items to make good and a cost estimate.
If you receive such a schedule and disagree with the sum being demanded (which is very common), appointing a solicitor is likely to be your best bet. A solicitor will check whether all wants of repair actually fall within the premises demised to you, will ensure that the dilapidations process is being conducted properly, and will help to negotiate a reduction in the sum.
Author: Giorgia Clements, Senior Associate, Penningtons Manches Cooper LLP